Neutral Citation Number: [2016] EWCA Civ 489
Case No: A3/2015/2646
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
THE HON MR JUSTICE BIRSS
[2015] EWHC 2097(Pat)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 27/05/2016
Before:
LORD JUSTICE TOMLINSON
LORD JUSTICE KITCHIN
and
SIR TIMOTHY LLOYD
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Between:
Samsung Electronics Co Ltd(a company incorporated under the laws of the Republic of Korea)
Samsung Electronics (UK) Ltd / Appellants
- and -
Telefonaktiebolaget L M Ericsson
(a company incorporated under the laws of Sweden)
Unwired Planet International Ltd
(a company incorporated under the laws of the Republic of Ireland)
Unwired Planet Inc
(a company incorporated under the laws of Delaware, USA)
Unwired Planet LLC
(a company incorporated under the laws of Nevada, USA)
Huawei Technologies Co Ltd
(a company incorporated under the laws of the People’s Republic of China)
Huawei Technologies (UK) Co Ltd / Respondents
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Jon Turner QC, Meredith Pickford QC and James Bourke
(instructed by Bristows LLP) on behalf of Samsung
Mark Brealey QC and Daniel Piccinin (instructed by Freshfields Bruckhaus Deringer LLP) appeared on behalf of Ericsson and Unwired Planet
James Segan (instructed by Powell Gilbert LLP) appeared on behalf of Huawei
Hearing date: 28 April 2016
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Approved Judgment
Judgment Approved by the court for handing down. / Unwired PlanetLord Justice Kitchin:
Judgment Approved by the court for handing down. / Unwired PlanetIntroduction
1. This is an appeal by the third and fourth defendants (together “Samsung”) against that part of the order of Birss J of 21 July 2015 which struck out one of Samsung’s competition law defences to this claim for patent infringement brought against it by the claimant (“UP”).
2. The defence the judge struck out is founded upon the transactions by which UP acquired title to five of the patents which it claims have been infringed. Samsung contends that the eleventh party (“Ericsson”) and three companies in the Unwired Planet group of companies, namely UP, the ninth party (“UP Inc”) and the tenth party (“UP LLC”) entered into arrangements comprising a master sale agreement (the “MSA”) and various associated agreements and assignments (together with the MSA, the “MSA agreements”) in order to transfer various patents and applications from Ericsson to UP, but that the MSA agreements failed fully to transfer an undertaking given by Ericsson to the European Telecommunication Standards Institute (“ETSI”) to offer its standard essential patents, including the five patents in suit, on fair, reasonable and non-discriminatory (“FRAND”) terms. Samsung alleges that the MSA agreements were therefore prohibited by Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) and are void. It also alleges that the MSA agreements were prohibited by Chapter I of the Competition Act 1998 but it has not been suggested that this allegation raises any issues different from those arising in relation to the allegation based upon Article 101 and so I shall say no more about it.
3. The judge held that there was no real prospect of the defence succeeding. Samsung contends that the judge erred in so doing. It says that this is a developing area of the law and that the defence depends upon factual issues that the judge could not resolve upon a summary application. Accordingly, it continues, the defence is properly arguable and the judge should not have disposed of it summarily in the way that he did.
The background
The parties
4. For the purpose of this appeal, the background may be summarised as follows. UP is a subsidiary of UP LLC which is in turn an indirect subsidiary of UP Inc. UP owns a portfolio of telecommunications patents. It is what is known as a patent assertion entity (“PAE”), that is to say, its sole or principal activity is the licensing of its patent portfolio and the collection of royalties. It does not practise the patents itself.
5. Ericsson makes and supplies telecommunications network equipment including radio base stations and core network infrastructure. It claims to own around 35,000 patents, many of which have been declared essential to various telecommunication standards including 2G standards (such as GSM/GPRS), 3G standards (such as UMTS) and 4G standards (such as LTE). Such standard essential patents are known as SEPs.
6. Samsung makes and supplies mobile devices and mobile telecommunications network infrastructure equipment. It is one of Ericsson’s competitors in the network infrastructure equipment market.
The MSA agreements
7. On 10 January 2013 Ericsson, a subsidiary of Ericsson called Cluster LLC, UP Inc and two other subsidiaries of UP Inc entered into the MSA, pursuant to which Ericsson agreed to transfer 2,185 patents and patent applications to UP LLC via Cluster LLC. Just over one month later, under a patent sale and grant back licence agreement dated 13 February 2013 (the “PSA”), Ericsson assigned this patent portfolio to UP LLC. On 27 February 2014, Ericsson, Cluster LLC and various UP companies, including UP itself, entered into an agreement which amended the MSA and added UP as a party to it. On that same day, UP LLC transferred the patent portfolio to UP.
8. As the judge explained, the MSA is not a simple sale agreement for it confers upon Ericsson a right to a share of the royalties generated from the licensing of the patent portfolio the subject of the agreement, and an obligation to transfer a substantial further body of patents, to be selected at Ericsson’s sole discretion, to the UP group of companies. Moreover and importantly, Ericsson has described its motive in transferring the portfolio to UP LLC as being to enable it fairly to earn more revenue. It was concerned that while the patents and applications remained within its own very large patent portfolio, its ability to earn a fair revenue from them was hindered. It considered that the UP group companies, on the other hand, with their smaller patent portfolio, would be able to generate a greater but nonetheless still fair revenue from them.
ETSI
9. ETSI is an independent non-profit making organisation which is recognised by the EU as the standard-setting body in the EU telecommunications sector. It has adopted the GSM, UMTS and LTE standards to which I have referred. As the Court of Justice explained in Case C-170/13 Huawei Technologies Ltd v ZTE Corp & anor. (re Smart Phone Standard Essential Patents) [2015] 5 CMLR 14, one of the objectives of ETSI is to reduce the risk to its members and others applying ETSI standards that investment in the preparation, adoption and application of standards will be wasted as a result of essential intellectual property rights (“essential IPR”) for those standards not being available. Accordingly, ETSI’s rules of procedure include, as Annex 6, the ETSI Intellectual Property Rights Policy (the “ETSI IPR Policy”). At all material times this provided that owners of intellectual property rights should be adequately and fairly rewarded for the use of those rights; that each of the members of ETSI must use its reasonable endeavours to inform ETSI of that member’s essential IPR in a timely fashion; and, by clause 6.1:
“When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licences on fair, reasonable and non-discriminatory (“FRAND”) terms and conditions under such IPR …”
10. Samsung contends and I accept for the purpose of this appeal that the aim of such a FRAND undertaking is to ensure that, once the industry has become locked into a standard, SEPs and other essential IPR are accessible to the users of that standard on FRAND terms and conditions. In particular, FRAND undertakings are intended to prevent essential IPR holders from making the implementation of a standard difficult by refusing to license or by requesting unfair, unreasonable or discriminatory licence fees (see the European Commission Guidelines on the applicability of Article 101 TFEU to Horizontal Co-operation Agreements (OJ C11, 14 January 2011) (the “Horizontal Guidelines”) at [287].
11. Three particular points merit emphasis at this stage. First, a patent only obtains SEP status in return for the proprietor’s irrevocable undertaking that it is prepared to grant licences on FRAND terms (see Huawei at [51]).
12. Second, the giving of a FRAND undertaking justifies the imposition on the proprietor of a SEP of an obligation to comply with that undertaking by not bringing an action against an infringer for a prohibitory injunction without alerting the alleged infringer and, if the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presenting to that alleged infringer a specific, written offer for a licence on such terms (see Huawei at [59]-[64]).
13. Third, the Commission has emphasised that, in order to safeguard the effectiveness of the FRAND commitment, the proprietor of a SEP must ensure that any company to which the SEP is transferred is bound by that commitment, for example through a contractual clause between buyer and seller (see the Horizontal Guidelines at [285]). This has now been recognised by ETSI which introduced into the ETSI IPR Policy in March 2013 a new clause 6.1 bis. This reads:
“FRAND licensing undertakings made pursuant to Clause 6 shall be interpreted as encumbrances that bind all successors-in-interest. Recognizing that this interpretation may not apply in all legal jurisdictions, any Declarant who has submitted a FRAND undertaking according to the POLICY who transfers ownership of ESSENTIAL IPR that is subject to such undertaking shall include appropriate provisions in the relevant transfer documents to ensure that the undertaking is binding on the transferee and that the transferee will similarly include appropriate provisions in the event of future transfers with the goal of binding all successors-in-interest. The undertaking shall be interpreted as binding on successors-in-interest regardless of whether such provisions are included in the relevant transfer documents.”
The FRAND declarations and the commencement of proceedings
14. UP LLC and UP gave FRAND undertakings to ETSI on 14 June 2013 and 6 March 2014, respectively. Then, on 10 March 2014, UP brought these proceedings for patent infringement in the Patents Court against Samsung and various other defendants. It asserted infringement of six patents, five of which had been acquired from Ericsson under the MSA agreements and had been declared by Ericsson to ETSI as SEPs. The FRAND undertaking which UP had given just a few days earlier extended to each of those five patents.
Three competition law defences
15. In its defence to the claim for patent infringement, Samsung has raised three competition law defences under Article 101 TFEU arising from the division by Ericsson of its patent portfolio and the transfer (or as Samsung would say, the attempted transfer) of a part of it under the MSA agreements to, ultimately, UP. It contends that in each case the object and effect of these agreements was and is unfairly and unreasonably to increase the returns that Ericsson is able to secure from the exploitation of its SEPs. The core of the anti-competitive conduct is said to be Ericsson’s strategic division of its original portfolio of SEPs and the transfer of part of it to UP in such a way as to place UP and Ericsson in the position of being able to extract unfair and unreasonable royalties from potential licensees, thereby harming consumers, competition and innovation.
The first defence
16. Samsung contends that the MSA agreements failed fully to transfer the FRAND undertakings given by Ericsson to ETSI, so as to bind UP. As originally formulated, this defence had three elements: (a) that the MSA agreements did not require UP to give any FRAND undertaking; (b) that even if UP was required to give a FRAND undertaking, third parties could not enforce that obligation; and (c) that the MSA agreements did not limit UP LLC and UP to the obtaining of licence terms that were no more favourable than those that Ericsson could itself secure.
The second defence
17. The second defence focuses on the division by Ericsson of its patent portfolio. Samsung asserts that Ericsson has, by this division, engineered a situation in which both it and UP are unavoidable trading partners for third party undertakings in the markets in which they operate and that each of them is now able to make excessive royalty demands from those undertakings. Moreover, Samsung continues, the aggregate of the licence fees they can now demand is higher than the fees that Ericsson could have demanded before it entered into the MSA agreements. Indeed, says Samsung, the MSA agreements were entered into with the object and have the potential effect of allowing UP and Ericsson to avoid licensing the patents on FRAND terms, thus distorting and restricting competition. It is important to note that Samsung does not contend that any division of a portfolio of essential patents is unlawful but rather that the division effected by the MSA agreements is unlawful because of their particular characteristics. In that regard Samsung focuses on the retention by Ericsson of the right to a substantial share in the licensing revenue generated by UP, the fact that Ericsson is required by the MSA to transfer to UP a substantial body of patents to be selected at Ericsson’s sole discretion and the fact that UP is a PAE and so can act aggressively and pursue potential licensees without regard to any need for a cross-licence.
The third defence
18. Samsung’s third defence is directed to particular terms of the MSA. It contends that clauses 3.4 and 6.1(aa) of the MSA are stand-alone infringements of Article 101. Clause 3.4 operates to set a minimum payment by UP to Ericsson and is said artificially to impose a floor on the minimum royalty likely to be agreed by UP. Clause 6.1(aa) restricts the basis upon which UP can negotiate or agree licence fee royalty rates and is said to prevent parties from entering into licences with other types of royalty arrangement which may more appropriately match their particular circumstances. In the result, says Samsung, these clauses have the object or potential effect of increasing the licence fees paid by third parties such as Samsung to use the patents transferred by Ericsson to UP and thereby increasing the returns to Ericsson and UP from the exploitation of those patents above the level that would have been obtainable in the absence of the MSA agreements.